4 Bright Spots in a Bear Market

12/09/2011 9:30 am EST

Focus: STOCKS

Ron Rowland

Editor, All Star Fund Trader

Bear markets—which is what US stocks are in by most long-term indicators—are not without their bright spots, which can include very impressive upside corrections, notes Ron Rowland of All-Star Fund Trader.

Last week’s 7.4% gain in the S&P 500 was a good example. The index is now up about 13% from its October 3 low.

The short-term explanation isn’t hard to discern: the Federal Reserve and other central banks signaled with a coordinated intervention that they recognize the crisis and are willing to act. This was helpful, but whether they can solve anything is another question.

European government bond yields remain high, as does the risk of default by some weaker nations. This week has brought several key events, including a European Central Bank policy meeting and a Eurozone summit meeting.

We are approaching the season when analysts issue annual forecasts. The strategy team at Goldman Sachs (GS), for its part, presented a somber 2012 picture. They project continued slowdown in all the developed economies, particularly Europe, with stock markets struggling to stay even. Goldman also warned crude-oil supplies are so tight that a jump to new record fuel prices is possible.

Finally, a quick observation on last Friday’s US unemployment report. A decline in the national jobless rate to 8.6% was encouraging, as was the creation of 120,000 new jobs. Yet the same Labor Department report said total civilian population rose by 172,000 in November. Hence, 120,000 new jobs is not even enough to keep up with population growth.

None of this means the stock market cannot keep rising into year-end, but we still see little reason to take much additional risk. Caution is still the best policy.

Daily and weekly volatility remain elevated. We will continue to manage that volatility with our current allocations to cash and favorable sectors.

Our stocks have performed well as markets bounce. We are especially encouraged to see Apple (AAPL) once again trade above its 50-day moving average. McDonalds (MCD) marked another new high, and is probably due for some short-term consolidation. Perrigo (PRGO) is approaching the $102 area where it peaked in October. This time PRGO may have enough momentum to break through.

We have a new buy recommendation today: Walgreen Company (WAG). Shares in the ubiquitous drugstore chain took a tumble in recent months, during difficult contract negotiations with pharmacy benefit managers. The stock is now turning back up, as it appears an agreement will be reached by year-end.

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